Five Reasons IBM's Not All That

Updated from 12:40 p.m. EST

SAN FRANCISCO -- After a 15% decline in the S&P 500 Index, it turns out we just needed a little help from IBM(IBM Quote), eh?

Shares of the technology giant led the market higher (as they like to say) on Wednesday, following a fourth-quarter earnings report on Tuesday that blew away analysts' estimates while also delivering an uplifting projection for 2009 profit.

IBM was recently up nearly 9% to $89.10, the S&P 500 had climbed more than a half-percent to bounce off a two-month low, and dogs and cats had never gotten along better.

Not to spoil the party or anything, but it seems like a decent time to flick a few kernels of reality into the proceedings for those digesting the assertion that the company's report signals an all-clear for the company, the tech sector and the overall market.

We're not exactly alone here. The folks at Credit Suisse, for example, took one look at IBM's projection of 2009 profit of $9.30 a share and promptly found it more than a dollar too high, going instead with their own estimate of $8.17 a share.

In that spirit, then, are a few reminders of why IBM's announcement wasn't exactly the sound of immediately delivering us all from the prospects of a muddle-through economy and with it, a range-bound stock market:

Revenue did stink. Funny how the whole missing-analysts'-revenue-forecasts-by-more-than-a-billion-dollars thing wasn't at the forefront of investors' minds on Wednesday. Nonetheless, the company's top line has retreated: Six months ago, IBM's second-quarter revenue rose 13%. In the third quarter, it rose 5%. For the fourth quarter, revenue fell 6.4%. Currency adjustments aside, that sort of trend isn't a ringing endorsement of IT spending health.

Dollar strength remains a weakness. IBM said Tuesday that at constant currencies, the company's revenue was flat. In its Europe/Middle East/Africa region, revenue fell 12% from currency impact. Why shouldn't that continue? As investor Gary Shilling pointed out to Bloomberg Television on Tuesday, the greenback remains the "best of a bad lot" in foreign currencies, and the attractiveness of Treasury bills for global customers shows little diminishment.

Hardware sales were awful. At this point in its history, the company's hardware operations, mainly through selling servers, mainframe computers and storage systems, is a mere sidelight. The company's division has now dipped to less than 10% of overall company revenue. That said, it does still move more than $20 billion of product a year, and its fourth-quarter numbers weren't pretty, as revenue fell 20% in the division. Investment bank Collins Stewart noted the news was not good for companies with a lot of business spending exposure, such as Benchmark Electronics(BHE Quote) and Celestica(CLS Quote).

EPS growth isn't net income growth. One grew 17%, the other grew 12%. While the company's run-up in EPS to $3.28 from $2.80 drew Tuesday headlines for its 25-cent thumping of analyst's projections, it's less impressive when you realize the company got 32 cents a share in help from a lower tax rate and stock repurchases. It sort of makes you wonder how "organically" the company was going to get to $9.30 a share next year.

Margins might be nearing a peak. The company did a solid job boosting gross margins in its tech services and business services divisions by about 5 and 6 percentage points, respectively. But investors might wonder if the company can be as efficient if this year's first quarter proves as demanding. While some rumors suggested the company would lay off as many as 16,000 employees (4% of its workforce), IBM said that its 2009 workforce "rebalancing" would be merely in "kind of a normal range." Whether the company can preserve margins without such a slashing will be a key to the first half of this year.

IBM has shown that it can withstand the early punishment of a global slowdown in tech spending while still delivering double-digit profit growth. But it may take a repeat performance three months from now to truly get the tech sector -- and the stock market -- off the mat.